Near-Record Decline in Q1 GDP Better Than Flash Estimate
The hand-wringing about the Q1 GDP data released today misses the point that the data were actually better than expected. The Canadian economy declined at an 8.2% annualized rate in the first quarter, less harsh than the earlier estimate by StatsCan of -10%. Of course, every sector of the economy was hit by the enforced shutdown, but not by nearly as much as most economists anticipated. For the month of March, the decline was 7.2%, less dire than the -9% earlier estimate.
The Canadian economy has been put in a medically induced coma. Never before in modern history have we seen a forced shutdown in the global economy so, not surprisingly, the incoming data for April is terrible. There is a good chance, however, that April will mark the bottom in economic activity as regions begin to ease restrictions.
Bank of Canada Moves to Restore “Financial Market Functionality”
The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic (see chart below).
Global Markets in Turmoil, Oil Prices Plunge Along With Yields
Markets shuddered in the face of a price war for oil and the economic fallout from the growing outbreak of coronavirus. Frightened investors poured into haven assets sending yields to unprecedented lows. Oil prices tumbled 30% after Saudi Arabia said it would cut most of its oil prices and boost output when Russia refused to join OPEC in propping up prices (see chart below). Foreign exchange markets convulsed, as the steep drops in oil and share prices overnight sparked a flight from commodity-linked currencies into the perceived safety of the Japanese yen and the US dollar.
Canadian 5-year Yield Fell To Lowest Level Since October
Global investors are selling stocks and piling into the safety of bonds in response to fears that the Wuhan coronavirus could disrupt global economic activity. Gold prices, another haven, have also risen. The Government of Canada 5-year bond yield traded this morning at roughly 1.35%, well below its nearly 1.70% level one month ago.
For this notoriously volatile data series, it is particularly true that ‘one month does not a trend make.’ Following last month’s dismal employment report, job growth rebounded in December, erasing almost half of the earlier decline (even more if you exclude transitory factors in November). As well, the unemployment rate reversed much of its November spike, capping the second-best year of job growth since the recession and supporting the Bank of Canada’s view that the Canadian economy is resilient.
The Canadian jobs market continued to surprise on the high-side–on track for one of its best years on record. This provides further confirmation to the Bank of Canada that additional easing in monetary policy is not necessary. The economy added 53,700 jobs in September, well above expectation, taking the year-to-date jobs gain to just over 358,000, the most in the first nine months of a year since 2002. The economy added 70,000 full-time jobs in September, with part-time employment down 16,300. Canada has added almost 300,000 new full-time jobs this year.
Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales rose for the sixth consecutive month. Transactions are now running almost 17% above the six-year low reached in February 2019, but remain about 10% below highs reached in 2016 and 2017. Toronto, Montreal and Vancouver all saw sales and prices rise. CREA updated its 2019 sales forecast, now predicting a 5% gain this year. Gains were led by a record-setting August in Winnipeg and a further improvement in the Fraser Valley. These confirm signs that the country’s housing market is returning to health.
The new First Time Home Buyer Incentive program from CMHC (Canadian Mortgage and Housing Corporation) was officially released on September 2. This program was met with mixed reactions across the mortgage industry, but we wanted to take a minute to give you the facts regarding the program. Below are the key points you need to know, and as always if you do have any further questions please reach out to us.
The Bank of Canada held the target overnight rate at 1.75% for the sixth consecutive decision and showed little willingness to ease monetary policy, as stronger domestic growth offsets the risk of mounting global trade tensions. There has been ongoing speculation that the Bank of Canada would be pushed into cutting interest rates by the Fed. I do not believe the Bank will let the US dictate monetary policy when the Canadian economy is clearly on the mend.
Statistics released late last week by the Canadian Real Estate Association (CREA) show that national home sales increased in May. Together with monthly gains in the previous two months, activity in May reached its highest level since early last year when the new B-20 stress testing was introduced. While last month’s home sales stood 8.9% above the six-year low posted in February 2019, this latest uptick has only just returned May’s sales level to its 10-year historical average (see chart below). Nationwide, sales were up 1.9% month-over-month, and relative to a year ago, sales rose 6.7% marking the biggest year-over-year gain since the booming summer of 2016.
In a terse statement, the Bank of Canada maintained its benchmark overnight rate for the fifth consecutive meeting and stated that economy was performing in line with the projections in the Bank’s April Monetary Policy Report (MPR). Following a slowdown in economic activity late last year and in the first quarter of this year, the Bank’s press release said that evidence was mounting that economic growth was rebounding in Q2.
In a speech early this week, Bank of Canada Governor Stephen Poloz said that it is time for some fresh ideas for Canada’s mortgage market. He suggested that changes could include encouraging longer than 5-year duration fixed-rate mortgage loans, the creation of a market for private mortgage-backed securities and the launch of shared-equity mortgages for first-time homebuyers proposed in the March federal budget.
Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales dropped sharply from January to February, plummeting 9.1% to its lowest level since November 2012. The month-over-month decline was the biggest since the B-20 stress test was introduced in January of last year.
The employment report is the lone bright spot in an economy that has slumped across the board. According to today’s jobs report from Statistics Canada, the economy added 55,900 net new jobs last month, all of them full-time positions. This is the second consecutive monthly job surge for an economy that has barely grown in the past five months (see chart below).
This morning, Stats Canada released the third quarter GDP figures indicating an expected slowdown to 2.0% growth (all figures quoted in annual rates), compared to a 2.9% pace in Q2. Over the first three quarters of this year, quarterly growth has averaged 2.2% which is down from the 3.0% annual growth recorded in 2017. The Canadian economy is at or near full capacity, so slower growth is not a bad thing.
However, while the headline growth of 2.0% was on trend, the details of the report are troubling.
Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales declined for the second consecutive month in October, edging back by 1.6% month-over-month (m/m) and down 3.7% from year-ago levels. Year-over-year sales in October are now about in line with their 10-year monthly average (see chart below). Existing home sales activity has picked up from levels early this year, but it is still considerably below the boom days of 2016 and early-2017 before the foreign purchase tax was introduced in Ontario (in April 2017), the new OSFI rules were implemented (in January 2018), and Bank of Canada tightening gained momentum.
For most people a mortgage is the biggest debt we will ever carry and a home is the most expensive purchase we will ever make. This is why it is absolutely crucial to avoid mistakes that cause you to pay more than you should or even jeopardize your ability to qualify for a mortgage.
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